Are we ready for bitcoin?

IN simple language, bitcoin is digital currency, digital cash or electronic currency. It has become a contentious issue for regulators, enforcers and tax authorities over the past decade since it was invented by an unknown programmer and released as an open software in 2009.

Bitcoin was created to be a secure, non-regulated, decentralised alternative currency, allowing users anonymity. It is a new way for people to do business. Bitcoins are brought into circulation through a process known as “mining”. Bitcoin transactions take place on virtual markets known as “exchanges” and are stored by users in unique “wallets”, which contain private keys that allow users to prove their ownership.

As of February 2015, more than 100,000 merchants and vendors accepted bitcoin as payment. According to a report published by Cambridge University recently, there are between three and six million people using a cryptocurrency wallet, most of them bitcoin. Government agencies are understandably concerned because of its ability to be used anonymously, and therefore a potential instrument for money laundering and various criminal activities.

Writer James E. McWhinney in Investopedia said bitcoin was “the first decentralised peer-to-peer payment network” powered by its users with no central authority or middlemen. That lack of central authority is the primary reason governments are afraid of it.

In April 2012, the United States Federal Bureau of Investigation published a report citing fears that bitcoins may be used by cybercriminals in illicit activities. The report, “Bitcoin Virtual Currency: Unique Features Present Distinct Challenges For Deterring Illicit Activity”, is available online.

In Europe, the European Banking Authority (EBA) issued a statement in 2013 warning the general public of risks in using virtual currency. In July 2014, the EBA advised financial institutions to stay away (not to buy, hold or sell digital currencies) until the law is in place. In January 2014, the National Bank of Belgium issued a warning that digital currencies are not issued by any central authority and, as such, bitcoin users face the risk of volatility, fraud and business non-acceptance.

Bulgaria, however, has accepted the digital currency. Its National Revenue Agency had issued new taxation guidelines stating that income from the sale of digital currencies such as bitcoin will be treated as income from the sale of financial assets and taxed at a rate of 10 per cent. Finland also embraced the digital currency and issued a regulatory guide in September 2013, imposing capital gains tax on bitcoins.

However, in January 2014, bitcoin was classified as a commodity after Finland’s central bank declared that it did not meet the definition of a currency.

France adopted an open mind, stating it has no intention of declaring it illegal. It is looking at its laws, how they can be improved to prevent criminal activities using this new currency. In April 2014, the French Ministry of Economy and Finance said while bitcoin was not officially recognised, revenues generated from digital currency transactions were subject to taxation.

Russia, meanwhile, took a tough stand. In February 2014, its General Prosecutor’s Office issued a statement that the official Russian currency was the ruble and the use of any other monetary instruments or surrogates was forbidden. In August 2014, Russia’s Finance Ministry announced its intention to ban bitcoin and any operations involving cryptocurrency. Similarly, China banned financial institutions from engaging in bitcoin business and transferring funds to and from bitcoin exchanges.

In the United Kingdom, the government has not explicitly recognised bitcoin as a currency. However, it treats payment by bitcoin as any other form of payment for tax purposes. In March 2014, its tax department issued a statement that VAT (value-added tax) will be due in the normal way from suppliers of any goods or services sold in exchange for bitcoin or other similar cryptocurrency.

For Malaysia, bitcoin is not recognised as legal tender, and Bank Negara Malaysia does not regulate the operations of bitcoin. The central bank has advised the public to be cautious of the risks associated with the use of such digital currency.

To recap, bitcoin is not legal tender in any jurisdiction. Bitcoin users do not need the existing banking system since the currency is created in cyberspace. It is digital in form and there is nothing tangible you can touch and hold. Its value fluctuates in a highly volatile manner. Since bitcoins are stored on users’ computers, users risk losing their money if they fail to implement adequate anti-virus and back-up measures. If you lose your computer, or if you throw it away without first removing your bitcoins, you will lose your digital fortune. McWhinney was right when he said that if you used bitcoin, you were trusting your money to a complex system you did not understand, people you knew nothing about, and an environment where you had no legal recourse.

Recently, on the Cambridge news portal, it was reported that cryptocurrencies like bitcoin should no longer be considered a passing fad. According to a study by the Cambridge Centre for Alternative Finance and the Judge Business School, millions of individuals are actively using cryptocurrency.

In light of that, can a mature cryptocurrency ecosystem come into being in Malaysia in the near future? Some quarters may have doubts, but a Malaysian portal confidently said “cryptocurrencies are here to stay”.

Salleh Buang formerly served the Attorney-General’s Chambers before he left for private practice, the corporate sector and then the academia. He can be reached via sallehbuang@hotmail.com